When investing in real estate an important decision to make will be whether or not you want to have a broker help make your real estate deals. Often, the answer to that question will have to do with where you are in your investing career. For those that are just beginning a broker can be a very useful tool in finding opportunities, what an investor should look for and what they don’t want to see in a property, and negotiating a deal that will make everyone happy. Those that are a bit seasoned in this area may not need so much help, but still can benefit in one way or another.

When preparing to purchase a commercial property for investment you may want the assistance of a broker. Having as much experience as they do in this field, a broker will be able to give good, solid reasons why a property may or may not be a good investment. If an investor is considering purchasing a building in order to section it off and lease out “stores” to those in retail, a broker may be able to let them know that this is not a good idea because there will shortly be a large shopping center being developed within a mile of this building. This would make it more difficult to lease out the spaces and it may not be a worthwhile investment unless the investor can come up with a different use for it. Without the knowledge of the broker, the investor may have ended up losing money due to a bad investment once the shopping mall came along.

A broker may also be able to hunt up other properties for investment. If, as an investor, you find that a property that you’ve been considering is not a good investment, a broker may be able to tell you about a few other properties that could be good for use in the way that you’re planning. A broker will also have information about properties before they even get listed. Sometimes this can work in your favor. If the Realtor knows of the property and tells you about it, you see it and are interested, you may be able to negotiate with the owner of the property before it ever gets listed. This may give you the heads up on properties that others may have outbid you on. You will not have to worry about competing with other investors because they will not have known of the property. A broker may do this for you if they will still get a commission on the deal or they may forgo a commission or two in order to claim you as a client and keep you coming back. If they make you money, you’ll be more willing to make them money. This can be a win win situation on both sides of the fence.

If you’ve been working with brokers for a while and have a reasonably good idea of what you’re doing as an investor, you may not want to work with a broker at all. Even if a broker has given you a property or two, they will not continue to do that for long. All other properties will have part of the profits divided with the broker. If you feel that you’ve gained enough experience to deal without a broker, you can potentially save yourself thousands that would otherwise be a commission to the broker.

Being able to work without a broker will mean that you’ll have to have some communication with those that are selling properties. If you’ve done a lot of networking in the time that you’ve been investing, chances are that you have done some networking and meeting of people that do what you do. You may know owners of several commercial buildings of your area. They may know that you are a good business to deal with when they decide to sell their property. In this case, there is little else that a broker will do for you besides deal with the legal end of the sale.

If you’ve paid close attention in the closings and have looked closely at the paperwork that’s changed hands during the meeting at the close of the sale, you should be able to handle this part yourself. The documents that brokers use to close a commercial property sale can be purchased at most business office supply stores and several bookstores. Additionally, you can draw up these documents yourself with the help of your computer and printer. If you purchase the documents once and make several copies of the blank documents, you’ll have a good start. After you’ve done a few closings yourself you may add some documents that pertain to your business dealings or you may always use the documents purchased. Either way, you will be able to handle the closing of property transactions which will again save you thousands over using a broker.

A broker can have their uses. When you are starting out in the field of commercial investing, they can be a wealth of information and very helpful in your transactions. In the beginning, they may be well worth the investment that you have to put into them. Over time, they may not be as necessary as previous. If you make a point to network with others in the same or related fields, you will find yourself getting information thrown at you left and right when a commercial property comes up for sale. That will eliminate the need for the broker in that sense. If you pay close attention to the closings and gather the necessary paperwork to learn how a property closing works, you will eliminate entirely the need for the broker and this will save your company thousands at each closing. It makes good business sense to use a broker in the beginning, but learning about their job will ultimately raise your profit margins as you eliminate their need and then the use of them at all.

In commercial real estate brokerage the prospecting letter process really works. To be successful at it you need to plan the process and control your actions as you progress.

Why will the ‘letter’ process help your prospecting efforts today? Well, it’s because the letters are less inclined to be ‘binned’; that is of course if you plan them correctly and follow the rules.

Here are some facts in comparing letters to emails:

Prospecting emails are not very successful at all. Most of the people you send them to will delete the communication quickly. As a by-product of the process you must have their approval to communicate in that way, otherwise you will be breaking the laws on ‘spam’.

A letter is very professional as long as you do not ‘overdo it’. In commercial real estate the best letter is compiled on one single page. The contents should be contained in no more than 4 paragraphs. Sign the letter personally in blue ink. Ensure that your signature is legible and professional (don’t sign in a ‘scrawl’ as it sends the wrong message).

Create the correspondence to introduce your upcoming telephone call. Make the call a few days after the letter has been received. The prospect will be expecting your call and will be more inclined to take it.

Always put your business card in the envelope. Don’t put anything else in a prospecting letter. The object is to sell yourself and your upcoming telephone call. Don’t confuse the message with bulky brochures on other issues and property matters. Focus on the one thing that is important, and that is your upcoming telephone call.

Design the letter for the person you are writing to. In other words you should have separate letters covering sales, leasing, property management, and retail. Get away from the generic approach and be specific to a part of the industry. Sell your upcoming telephone call on that basis.

Get a reference book on ‘words that sell’ or ‘phrases that sell’. Add a few words from the books into your letter to increase readability.

Every good prospecting letter should have a great headline. You want the person to read the message. Perhaps the headline you use could reflect local property activity or changes. Understand the concerns of the market and match the letter to the focus of investors, property owners, or tenants as the case may be.

The letters should be sent every 60 to 90 days. As part of that process, follow-up as many of the letters that you can. It directly follows that you should not send out too many at once and thereby create a situation where you cannot make the calls.

This is a system of prospecting. The letters are part of the bigger picture. They do not replace cold calling, but they add to the momentum that you would have in other prospecting processes. Start using the system as a boost to your market share.

To add a little oomph to business these days, LO’s are turning away from the residential realm and focusing their efforts on potentially bigger fish – the commercial arena. Find out the differences between the two markets – from documentation to financing – and why you should line up to tap these unchartered waters. As a bonus, a commercial originator in action shares his words of warning before stepping into bigger territory.

With the subprime fallout, amped up regulation and a slowing residential market, many originators are feeling the squeeze of increased competition and fewer deals.

“Many brokers are making the transition into small commercial lending as a way to serve their existing clients better, and to branch out into a growing market,” said Reed Larsen, vice president of Homeland Mortgage Inc. and Homeland Funding Corp. “Many mortgage brokers have worked hard to build good relationships with their clients over the years, particularly with small business owners and self-employed borrowers who need the kind of expertise and the level of service that good brokers provide. These entrepreneurial clients often ask their brokers about commercial loans, and brokers would rather close those loans than send their hard-earned clients down the road to a competitor.”

What’s the difference?

While both residential and commercial brokers seek to find loan deals for individuals buying property, the methods to get these loans are very different.

Forms

According to Kristin Williams, of Silver Hill Financial LLC, residential deals all require the same forms.
“It’s very standardized,” she said. “1003, 1008, VOD, VOE, etc. But in commercial, each company has their own separate set of documents they require.” In commercial, the deals are all non-standardized and individualized.

Finding value

When it comes to finding comparable in the residential realm, Williams said it is usually easy and quick.

“Traditionally, residential properties are very cookie cutter so you can get several appraisals done very quickly — because there are so many comparable properties out there,” she said. “In commercial, buildings are extremely unique. Appraisal time takes much longer because it’s harder to find similar property types.”

This can lead to more complex, more thorough appraisals — up to 100 pages long — which can take up to four weeks and cost between $1,500 and $4,000.

However, in commercial, “traditionally, LTVs are very limited just because of the riskiness of the transaction,” she said. “They offer lower LTVs to lower their risk. About 75 percent, sometimes 80 percent is the highest LTV for commercial.”

Also, residential originators consider a borrower’s debt-to-income (DTI) ratio by assessing the individual’s personal income. In a commercial transaction, however, a debt service coverage ratio (DSCR) is assessed, which considers how much a property or business occupying the space must have to cover its debt.

In Silver Hill’s case, the following are considered ineligible properties and it would not provide funding: traditional churches, raw land and farms, construction, development, rehab and adult entertainment facilities.

It is best to ask your lender before continuing with the transaction.

How does financing work?

While traditionally, residential brokers can obtain funding with a local lender, LOs need to do a little investigative work to find the best deals for their client. What financing sources are available to commercial brokers?

Banks

“Traditional banks and credit unions are great at offering loans at very competitive rates for your higher-credit-score client,” Williams said. “However, they do have some specific guidelines of the types of properties and the loam amounts. Lots of times, the riskier the property type, the less opportunity you have at a traditional bank.”

Banks also charge a large good faith fee before the loan is even processed, sometimes upwards of $5,000.

SBA loans

SBA loans are multi-faceted if someone wants to pay for the building, business or equipment all in one. It is also good as a standard business loan to provide funding for disaster relief. However, SBA loans take a lot of time — up to 3 months — to finish and requires a lot of documentation.

Private/hard money lenders

Private/hard money lenders are the last-stop shop that is great for high-credit-risk clients, Williams said. They are also bankruptcy or foreclosure friendly.

“They get the loan done quickly,” Williams said. “However, the loan terms are the least favorable with extremely high interest rates — upwards of 15 percent — and the loan balance will come due at a very short period of time.”

There is also a lock-out period that freezes the client from refinancing.

Williams did say, however, that all small-balance commercial lenders have their own set of requirements and procedures and it is important to research them and educate the client before going forward.

Buddying up

Finding a good commercial lender may be easier than originators think, as many are reaching out to brokers — teaching them how to make the residential-to-commercial change and establishing referral relationships.

“As small business in America continues to expand, commercial lenders are reaching out to educate and train mortgage brokers on how to originate commercial loans both as a way to build a viable sales channel into the small commercial market, and as a way to leverage the good relationships brokers have already built with their entrepreneurial clients,” Larsen said. “Lenders are making it easier for brokers to make the transition, by simplifying the application requirements, providing classes, distributing marketing materials and program information, and coaching brokers through the commercial loan process from start to finish.”

Benefits of going commercial

“(Commercial) is the ideal arena for accommodating the skills and experiences of residential mortgage brokers,” said Joe Mardesich, president and CEO of Nationwide Commercial Funding, a national mortgage brokerage. “There are numerous advantages for being in the commercial mortgage business.”

Less sensitive to interest rates

The residential loan business is highly sensitive to interest rates, Mardesich said. The higher the rates, the lower will be the number of homeowners who refinance, take out equity loans or consolidate debt. And though the purchase loan business is still available, it may eventually slow if rates rise to a point where fewer people will be able to qualify as home purchasers.

In the commercial mortgage sector, however, rising rates do not have the considerable negative impact that exists in the residential mortgage sector.

“First, most commercial mortgages have balloon payments,” Mardesich said. “Most commercial borrowers have no choice but to refinance or to sell, regardless of where rates may be, every 5 to 10 years. Both selling and refinancing result in new loans, which of course. mean income for the commercial broker.

“Second, commercial real estate owners and investors make their money by buying, selling, exchanging, developing and refinancing. They don’t stop doing deals as rates move up or down. They find ways to have increased interest costs covered by their tenants or other end-users of their properties. Homeowners, by contrast, want to buy a place in which to live and must factor interest costs into their budgets. If interest rates put homeownership out of their reach, they will remain renters, tenants of those who utilize commercial mortgages.

“Third, as indicated above, rising rates can actually increase rental demand and revenue for the owners of apartments, mobile home parks, and certain other types of properties. The beneficiary is not only the owner, the developer of apartments, and the developer/owner of mobile home parks, but also the mortgage brokers who help to finance those properties.”

Growing competition in the residential mortgage business

According to Mardesich, more and more real estate agents are competing with mortgage brokers.

“The numbers increase daily,” he said. “With the Internet, people can shop online and have 5 or 6 lenders or brokers competing for their business with a mouse click. The loan products you and your competitors sell are all the same, because the secondary market is so consolidated in the residential industry. The residential mortgage business has become a frantic ‘commodity’ business, providing revenue to the lowest bidder.”

In the commercial mortgage business, however, the lowest bidder is not necessarily king. There is much less competition than in residential real estate. And there are many portfolio lenders who do not sell their loans to a consolidated secondary market, i.e. there are a great variety of available programs from one lender or broker to another. As a result, by specializing and developing a niche, you can develop a meaningful competitive edge, Mardesich said.

Less regulation in commercial

The residential industry is chock full of rules and regulations.

However, in the commercial mortgage business, you don’t have to worry about the Real Estate Settlement Procedures Act. There are no Good Faith Estimates. No TILAs. You can pay referral fees to anyone, regardless of the service they may perform. Yield spreads are generally not disclosed. Most states do not require any licensing for commercial mortgage brokers, Mardesich said.

The rewards of commercial

The rewards of the commercial mortgage business can be substantial, impacting income and lifestyle. Yet, comparatively few residential brokers are reaping the rewards that await them in the field of commercial mortgages.

According to Williams, commercial brokers who close with Silver Hill average a commission of $10,400, compared to the $3,000-$8,000 with a residential loan.

“Brokers know that the market is strong and growing,” Larsen said. “They see commercial lending as a great way to serve their existing clients better, provide a more complete array of lending products to new customers, and continue to grow despite the recent woes of the residential lending market. It has never been easier for a good residential loan broker to step up to commercial lending.

Simply explained, a commercial broker is a special type of real estate broker that works especially with selling and listing various types of commercial properties, including industrial properties, businesses, office buildings, and even apartments. If you are going to be involved in commercial investing it is imperative that you find a good commercial broker. A great broker is very important if you want to be able to find some great properties. Having a good working relationship with a commercial broker can give you some access to hot listing that most people will never even see, such as future listings, current listings, and even pocket listings.

So, now that you realize how important a commercial broker is, you probably also know that you need to make sure that you pick the right commercial broker for your needs. Picking the right broker can help you succeed in commercial real estate; however, the wrong broker may lead you into a disaster. The following are some great tips that will help you pick out the best commercial broker for your needs.

Tip #1 – Check Their Specialties – When trying to pick out the right commercial broker, you will want to check and see what their specialties are. You will probably want to pick a broker that has specialties in your area of investing. Some brokers specialize in leasing, buildings, land development, and land. Once you find out their specialty you can decide whether they will be a good fit for what you are looking for.

Tip #2 – Find Out How Experienced They Are – Another thing to keep in mind is the amount of experience that the broker has. You want a broker that has experience in the commercial real estate market and that knows what they are doing. Going with a broker without much experience may not be the best choice.

Tip #3 – What are Their Transaction Volumes – You may also want to find out a bit of their transaction volumes as well when considering a broker. Find out the volume in the number of sales they make and the number of dollars as well. This will clue you in to whether or not they are really doing a great job at what they do.

Tip #4 – Do They Have Any Affiliations or Accreditations? – Also find out whether a broker you are considering has any affiliations or accreditations, such as with the CCIM. This will let you know a bit about their professional life and how reliable they may actually be.

Tip #5 – Do They Have Connections? – Often in the field of commercial real estate, having the right connections can be very important. You want to look for a commercial real estate broker that has connections with city planners in the area and that is also connected to the political processes in the area too. Also find out if they have good mortgage broker and banking connections as well, since these will be important to you down the road.

Tip #6 – Follow Up is Essential – A good broker should always follow up. They should always return phone calls, and they should also keep the promises that they make too. If the broker is not good at following up, then you should consider someone else.

Tip #7 – How Do They Communicate? – The communication style of the broker is going to be very important as well. Find out how the broker communicates when you are trying to pick a good broker. You need to be able to communicate well with your broker and made sure that you are both on the same page, so communication is going to be very vital.

How to Find a Good Broker

Now that you know some good tips for picking out a good broker, you may also need to know how and where you can find one. One way you may be able to find a good commercial real estate broker is by asking for a reference from a title company. Often they work extensively with commercial brokers, so they can provide you with a great recommendation. Commercial appraisers may also be able to steer you in the right direction with a reference of someone good they have worked with in the past too.

You can also check with your local Chambers of Commerce or with the Local Economic Development Departments as well for a commercial broker recommendation. Often you can go online and look at commercial properties for sale and find out what broker is listing them to find a good broker. Also, check around with other investors that you know in your area. Chances are they can send you to an excellent commercial real estate broker.

Remember, finding a good commercial broker is going to be key to your success as an investor. Keeping these tips in mind when looking for a broker can definitely help you to find a good one. Once you find a great commercial real estate broker, you will be able to start looking for great commercial deals that you can invest in and then you can start profiting from your investing as well.